Tax Case (Appeal) v. M/S.george Oakes Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 06.06.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.435 of 2007The Commissioner of Income-tax,Chennai-1. ..Appellant/RespondentVsM/s.George Oakes Ltd.,43, Greams Road,P.O. Box 4518,Chennai-600 006. ..Respondent/AppellantAppeal under Section 260A of the Income-tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Bench "A",Chennai in I.T.A. No.2966/Mds/04 dated 01.09.2006 for theassessment year 2001-2002. against the order of the Commissionerof Income Tax (Appeals) III Chennnai, dated 20/10/04 for theAssessment year 2001-2002 in ITA No.100/2004-05/A111 against theorder of the Deputy Commissioner of Income Tax Company circle II(2) Chennai 34 dated 31.3.2004 and made in PAN GIR No.AAACG 1659Grespectively. For Appellant :Mr.J.Naresh Kumar,Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income TaxAct, 1961 by the Revenue, against the order of the Income TaxAppellate Tribunal, Bench "A", Chennai in I.T.A. No.2966/Mds/04dated 01.09.2006 raising the following substantial question oflaw:- Whether on the facts and circumstances of thecase, the Tribunal was right in holding thatthe assessee was entitled to value its opening https://hcservices.ecourts.gov.in/hcservices/ stock in one way and the closing stock inanother, during the relevant year whenAccounting Standard 2 had come into effect inthe earlier year itself? 2.The facts leading to the above substantial question oflaw are as under:The assessee is a Company. The relevant assessment year is2001-2002 and the corresponding accounting year ended on31.03.2001. The original Return of income was filed on 30.10.2001declaring total income at Rs.1,27,00,922/-. Later, the assesseefiled revised Return declaring total income at Rs.1,19,74,004/- on27.11.2001. The Assessing Officer noted that the assessee madechanges in the method of valuation of stock. The Assessing Officercompleted the assessment under Section 143(3) of the Income-taxAct ("Act" in short). While completing the assessment, theAssessing Officer made an addition of Rs.19,64,000/- representingthe reduction of profit due to the change in valuation of stock.Aggrieved by the order, the assessee filed an appeal to theCommissioner of Income-tax (Appeals). The C.I.T.(A) dismissed theappeal and confirmed the order of the Assessing Officer.Aggrieved, the assessee filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal allowedthe appeal filed by the assessee on the ground that the change ofaccounting method is bona fide one and relied on this Courtjudgment reported in 149 ITR 759 in the case of C.I.T. Vs.Carborandum Universal Ltd. Hence the present appeal is filed bythe Revenue. 3.Learned Standing Counsel appearing for the Revenuesubmitted that the assessee has taken into account only the changein valuation of closing stock for the year by following theAccounting Standard AS-2. The opening stock however, remainsundisturbed. It is also further submitted that because of thevaluation of opening and closing stock by different methods, therewas a consequential reduction of total income declared for theyear and hence the Assessing Officer is right in his opinion thatthe amount of Rs.19.64 lakhs representing reduction of profit wasincludible in the total income of the assessee. 3.Learned Standing Counsel appearing for the Revenuesubmitted that the assessee has taken into account only the changein valuation of closing stock for the year by following theAccounting Standard AS-2. The opening stock however, remainsundisturbed. It is also further submitted that because of thevaluation of opening and closing stock by different methods, therewas a consequential reduction of total income declared for theyear and hence the Assessing Officer is right in his opinion thatthe amount of Rs.19.64 lakhs representing reduction of profit wasincludible in the total income of the assessee. 4.Heard the counsel. The Institute of CharteredAccountant of India by its Accounting Standard AS 2 (Valuation ofInventory), has prescribed the standard for valuation ofinventory. According to this standard, the inventory has to bevalued at purchase cost price less commission and discount onpurchase (if any) and the commission and discount on purchase inrespect of the goods sold should be adjusted against cost of goodssold. Being compulsory the company has adopted the AccountingStandard AS-2 as per the guidelines prescribed by the Institute ofChartered Accountant of India. In this case there is a specificfinding that the change in accounting method has not been found to https://hcservices.ecourts.gov.in/hcservices/ have been made with a mala fide intention. Such a change inmethod of accounting is bona fide and the same is made mandatoryby the Institute of Chartered Accountant of India to be followedin the preparation of financial accounts. Under suchcircumstances, in the year of change, some discrepancy is boundto happen in the profitability of the company as compared toprevious year. However, in succeeding years, there will not beany discrepancy on this account. When the change of accountingmethod is bona fide and also the same is recognised in accountingprinciple, the resultant variation in income cannot be forced tobe taxed upon the assessee. This Court in the case ofCommissioner of Income-tax, Tamil Nadu Vs. Carborandum UniversalLtd., reported in 149 ITR 759, considered the scope of change ofmethod of accounting and held as follows:- "Therefore, in view of the findings of theTribunal that the change of the method is bonafide and is intended to be followed in future,year after year, the change has to be acceptedby the Revenue, notwithstanding the fact thatduring the assessment year which is the firstyear when the change of method is broughtabout it has resulted in a prejudice ordetriment to the Revenue. So long as themethod of valuation adopted by the assesseegets recognition from the practicingacccountants and the commercial world forvaluation of stock-in-trade, the adoption ofthat method could not be questioned by theRevenue unless the adoption of that method isfound to be not bona fide or restricted for aparticular year."The Tribunal correctly followed the principles enunciated in theabove judgment and came to the correct conclusion. The reasonsgiven by the Tribunal are based on valid materials and evidence.Under these circumstances, we do not find any error or legalinfirmity in the order of the Tribunal so as to warrantinterference. 5.In view of the foregoing reasons, no substantialquestion of law arises for consideration of this Court andaccordingly the tax case is dismissed. Consequently, M.P.No.1 of2007 is closed. No costs. kmSd/Asst.Registrar /true copy/ Sub Asst.Registrar To 1. The Assistant Registrar, Income-tax Appellate Tribunal, Income-tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai. 2. The Commissioner of Income-tax (Appeals) III, Chennai-600 034. Chennai-600 034. 3. The Dy.Commissioner of Income-tax, Co. Cir.II(2), Chennai-34. 4. The Commissioner of Income Tax,Chennai 1.Chennai 1. + 1 cc to Mrs. Pushya sitaraman, Advocate SR No. 32689NSM(CO)SR/18.6.2007 T.C.(A) No.435 of 2007